Does a Texas professional employer organization (PEO) need a money transmission license to pay its clients' employees?

Plain-English summary

A professional employer organization, or PEO, is a company a business hires to take over the back-office work of having employees: running payroll, paying employment taxes, handling benefits, and managing HR. In Texas, a PEO has to be licensed under chapter 91 of the Labor Code, and it operates in a "coemployment" arrangement where the PEO and its client share employer responsibilities. Separately, chapter 151 of the Finance Code regulates money services businesses and requires anyone "engaged in the business of money transmission" to get a license from the Banking Commissioner. Because a PEO handles large sums of its clients' money to make payroll, the Banking Commissioner asked the Attorney General a clean question: does a licensed PEO also have to get a money transmission license?

The AG walked through both statutes. Under chapter 91, a PEO assumes responsibility for paying wages to covered employees, and it must do so without regard to whether the client has paid the PEO. Chapter 91 expressly designates the PEO as "the employer of a covered employee for purposes of" paying wages. Chapter 151, by contrast, defines money transmission as receiving money in exchange for a promise to make that money available later or at a different location, for compensation. The Commissioner's request floated a distinction between a PEO that pays wages and is later reimbursed (not money transmission) and one that gets an advance from the client (possibly money transmission). The AG rejected that line. Because a PEO's duty to pay wages exists no matter when or whether the client pays, a PEO paying wages is acting as an employer, not as a money transmitter, and there is no reason to treat an advance differently from a reimbursement.

So the AG concluded that a court would not find a PEO engaged in money transmission merely by paying wages under chapter 91, and that reading chapter 151 to require a second license would push it well past what the Legislature intended. The AG kept the conclusion tied to the statutory duties: on unusual facts, a PEO might promise to make a payment that is not part of the professional employer services agreement, and that could raise a money transmission question, but whether any particular entity is in the money transmission business is a fact question outside the scope of an AG opinion. The AG also noted that chapter 151 lets the Banking Commissioner coordinate and share information with other regulators to administer the chapter.

Currency note

This opinion was issued in 2020. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. The cited chapters of the Labor Code and Finance Code can be amended, so verify current law before relying on any specific rule mentioned here.

What the opinion meant for those who asked

The opinion was written for the Banking Commissioner, who administers the money transmission licensing scheme and needed to know whether to treat PEOs as money transmitters. For the Department of Banking, the takeaway was that a PEO carrying out its ordinary chapter 91 duties did not, on that basis alone, fall under chapter 151's licensing requirement. For PEOs and the payroll-and-HR industry, it meant that performing the statutory job of paying covered employees' wages did not trigger a separate money transmission license. For a client business using a PEO, the opinion clarified that its provider's core payroll function was governed by the Labor Code's PEO scheme, not the money services regime. The AG left a door open for fact-specific situations: a PEO that promised to make payments outside the professional employer services agreement could present a money transmission question, and the determination of whether any entity is actually in that business was left to be resolved on the facts, not by the opinion.

Common questions

Q: What is a PEO?
A: A professional employer organization is a company that contracts with a client business to provide professional employer services, such as payroll, taxes, benefits, and HR, under a coemployment arrangement. Texas requires PEOs to be licensed under chapter 91 of the Labor Code.

Q: Why might a PEO need a money transmission license?
A: Because PEOs receive and pay out clients' money to cover payroll, the question arose whether that handling of money counts as "money transmission" under chapter 151 of the Finance Code, which would require a license from the Banking Commissioner.

Q: What did the AG decide?
A: That paying wages under chapter 91 is the PEO acting as a statutory employer, not as a money transmitter, so a PEO does not need a separate chapter 151 money transmission license merely for performing those duties.

Q: Does it matter whether the client pays the PEO in advance or reimburses it later?
A: No. The AG explained that a PEO's duty to pay wages exists regardless of when or whether the client pays, so an advance and a reimbursement are treated the same.

Q: Could a PEO ever be subject to chapter 151?
A: Possibly, on particular facts. If a PEO promised to make a payment not governed by the professional employer services agreement, that could raise a money transmission question. Whether any entity is actually engaged in money transmission is a fact question the AG opinion did not resolve.

Background and statutory framework

The opinion reads two licensing schemes together. Chapter 91 of the Labor Code (sections 91.001 through 91.062) governs professional employer organizations: it requires a PEO license (section 91.011), sets up the coemployment relationship (sections 91.001(3-b) and 91.0011), and assigns the PEO responsibility for paying wages without regard to client payment (section 91.032(a)(2)) while designating the PEO as the employer for purposes of wage payment (section 91.044(a), cross-referencing the wage-payment provisions in sections 61.001 through 61.095). Chapter 151 of the Finance Code (sections 151.001 through 151.801) governs money services businesses, requires a money transmission license from the Banking Commissioner (sections 151.302 and 151.305), and defines money transmission as receiving money for a promise to make it available later or elsewhere (section 151.301(b)(4)). The AG applied standard statutory-construction principles, citing the Texas Supreme Court's instruction to follow the Legislature's intent as shown by plain language in Brazos Elec. Power Coop., Inc. v. Tex. Comm'n on Envt'l Quality and to read statutes within the surrounding statutory landscape in LTTS Charter Sch., Inc. v. C2 Constr., Inc., and described the coemployment relationship by reference to Rodriguez v. Lockhart Contracting Servs., Inc. The AG tied the fact-question limitation to its earlier Opinion KP-0178 (2018).

Citations and references

Statutory provisions:

• Tex. Lab. Code ch. 91 (professional employer organizations); ch. 61 (payment of wages)
• Tex. Fin. Code ch. 151 (money services businesses and money transmission)

Cases:

• Rodriguez v. Lockhart Contracting Servs., Inc., 499 S.W.3d 48 (Tex. App.-San Antonio 2016, no pet.)
• Brazos Elec. Power Coop., Inc. v. Tex. Comm'n on Envt'l Quality, 576 S.W.3d 374 (Tex. 2019)
• LTTS Charter Sch., Inc. v. C2 Constr., Inc., 342 S.W.3d 73 (Tex. 2011)

Related opinion:

• Tex. Att'y Gen. Op. No. KP-0178 (2018) (whether an entity engages in money transmission is a fact question outside an AG opinion)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/ken-paxton/kp-0336
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2020/kp-0336.pdf

Original opinion text

KEN PAXTON
ATTORNEY GENERAL OF TEXAS

October 20, 2020

Mr. Charles G. Cooper
Banking Commissioner
Texas Department of Banking
2601 North Lamar Boulevard
Austin, Texas 78705

Opinion No. KP-0336

Re: Whether a professional employer organization that conducts money transmission as defined in the Finance Code is subject to licensure under the Finance Code, notwithstanding licensure as a professional employer organization under the Labor Code (RQ-0348-KP)

Dear Commissioner Cooper:

You ask whether a person or entity licensed and performing services as a professional employer organization ("PEO") under chapter 91 of the Labor Code must also obtain a money transmission license under chapter 151 of the Finance Code.¹ We first review licensure as a PEO under chapter 91 of the Labor Code and then examine licensure as a money transmitter under chapter 151 of the Finance Code.

Under chapter 91, a PEO is an entity that contracts with a client to provide professional employer services, including certain administrative tasks such as payroll, taxes, benefits, human resources, and other functions to assist in the operation of the client's business. TEX. LAB. CODE §§ 91.001-.062. An entity may not engage in professional employer services without obtaining a PEO license. Id. § 91.011. The Department of Licensing and Regulation administers chapter 91, including the licensure of PEOs, the investigation of applicants, and the discipline of PEOs for delinquent payments and other violations of chapter 91.² Id. §§ 91.016, .020.

A licensed PEO providing professional employer services under chapter 91 operates under a "coemployment relationship," whereby employer responsibility with respect to covered employees is shared between a PEO and the PEO's client. Id. §§ 91.001(3-b), .0011; see generally Rodriguez v. Lockhart Contracting Servs., Inc., 499 S.W.3d 48, 54 (Tex. App.-San Antonio 2016, no pet.) (describing the relationship). The PEO "shall establish the terms of a professional employer services agreement by a written contract between" the PEO and the client. TEX. LAB. CODE § 91.031(a). Under the contract, the PEO and the client share certain employer responsibilities. Id. § 91.032(a)(1), (4), (5). The client retains sole responsibility to direct and control covered employees as necessary to conduct the client's business. Id. § 91.032(b). But the PEO must assume "responsibility for the payment of wages to the covered employees without regard to payments by the client to the" PEO. Id. § 91.032(a)(2). The PEO further assumes responsibility for the payment and collection of payroll taxes, and must manage and make timely payments for insurance premiums, benefit and welfare plans, and other employee withholding. Id. §§ 91.032(a)(3), .046. A client and the PEO "are each considered an employer . . . for purposes of sponsoring retirement and welfare benefit plans for covered employees." Id. § 91.041(a). Thus, the PEO and the client, within their respective spheres of authority, both serve as employers of a covered employee. Id. § 91.001(7-a).

Chapter 151 of the Finance Code, on the other hand, governs money services businesses, including money transmission businesses.³ TEX. FIN. CODE §§ 151.001-.801. In particular, subchapter D of chapter 151 requires a person or entity engaged in the business of money transmission to obtain a license issued by the Banking Commissioner. Id. §§ 151.302, .305. For purposes of chapter 151, "a person engages in the business of money transmission if the person receives compensation or expects to receive compensation, directly or indirectly, for conducting money transmission." Id. § 151.302(b). "Money transmission" is defined as "the receipt of money or monetary value⁴ by any means in exchange for a promise to make the money or monetary value available at a later time or different location." Id. § 151.301(b)(4). The term "includes . . . receiving money or monetary value for transmission[.]" Id. § 151.301(b)(4)(A)(ii). Thus, chapter 151 requires a person who receives money under a promise to transmit it to another person or location, for compensation, to have a money transmission license. See id. §§ 151.301(b)(4), .302(b). Exceptions exist, and the Commissioner may exempt certain persons from the licensing requirements, but nothing in chapter 151 expressly exempts a PEO from that chapter's reach.⁵ See, e.g., id. §§ 151.003, .302(b), (c).

You suggest that "[a] PEO that pays wages to its covered employees and is later reimbursed by its employer-client is not engaged in the business of money transmission; it is only the advance receipt of payroll funds from an employer-client that implicates [chapter 151]."⁶ We disagree with that distinction. A court's main objective in construing the law is to discern the Legislature's intent. Brazos Elec. Power Coop., Inc. v. Tex. Comm'n on Envt'l Quality, 576 S.W.3d 374, 383-84 (Tex. 2019). And the best indicator of intent is the plain language of the law itself. Id. at 384. Furthermore, courts do not construe statutes in isolation but rather within the context of "the surrounding statutory landscape." LTTS Charter Sch., Inc. v. C2 Constr., Inc., 342 S.W.3d 73, 75 (Tex. 2011).

Chapter 91 expressly designates a PEO as "the employer of a covered employee for purposes of" the payment of wages. TEX. LAB. CODE § 91.044(a) (emphasis added); see id. §§ 61.001-.095 (regarding payment of wages); cf. id. § 91.0011(a) (recognizing the "coemployment relationship" between a PEO and client). Thus, a PEO's payment of wages under chapter 91 and a professional employer services agreement satisfies the PEO's duty as an employer of a covered employee. And a PEO's duty to pay wages under chapter 91 exists irrespective of receiving any payment from a client. Id. § 91.032(a)(2). That is, the absence of compensation from a client does not absolve a PEO from its duty to pay wages to covered employees. By definition, then, a PEO that pays wages to its employees under chapter 91 acts in its capacity as an employer, not as a money transmitter. Therefore, we see no reason to distinguish between a PEO that receives an advance payment from a client and one that receives a reimbursement from a client for the same services.

Accordingly, we do not believe a court would conclude that a PEO engages in the business of money transmission for purposes of chapter 151 of the Finance Code by merely paying wages to its employees under chapter 91 of the Labor Code. To conclude otherwise would extend chapter 151's reach far beyond what the Legislature intended. That said, on particular facts, a PEO could promise to make a payment not governed by the professional employer services agreement under circumstances that may constitute money transmission under chapter 151 of the Finance Code. Cf. id. § 91.032(c) (concerning client-employer's obligation to pay wages not governed by the agreement.). Whether a person or entity engages in money transmission for purposes of chapter 151 is a fact question that cannot be resolved through an Attorney General opinion. See Tex. Att'y Gen. Op. No. KP-0178 (2018) at 3. We also note that chapter 151 expressly authorizes the Banking Commissioner to "cooperate, coordinate, and share information with another state" agency that regulates a person engaged in money transmission services. See TEX. FIN. CODE § 151.105(a)(1). Consistent with that provision, the Banking Commissioner may exchange information and work with such an agency "[t]o efficiently and effectively administer and enforce [chapter 151.]" Id. § 151.105(a)-(b).

¹ See Letter from Charles G. Cooper, Banking Comm'r, Tex. Dep't of Banking, to Honorable Ken Paxton, Tex. Att'y Gen. at 1-2 (Apr. 21, 2020), https://www2.texasattorneygeneral.gov/opinions/opinions/51paxton/rq/2020/pdf/RQ0348KP.pdf ("Request Letter").

² To obtain a license, a PEO applicant must identify controlling persons and submit their fingerprints for background checks. TEX. LAB. CODE § 91.013(a). The PEO applicant also must submit a financial statement to demonstrate sufficient working capital. Id. § 91.014(b).

³ The Department of Banking administers chapter 151. TEX. FIN. CODE § 151.101; see also id. § 151.002(b)(9). The Finance Commission promulgates regulatory rules to implement the chapter. Id. § 151.102. And the Banking Commissioner possesses general regulatory authority. Id. § 151.103(c) (authorizing the commissioner to impose "any condition the commissioner considers reasonably necessary or appropriate to carry out and achieve the purposes of this chapter").

⁴ "Money" or "monetary value" is defined as "currency or a claim that can be converted into currency through a financial institution, electronic payments network, or other formal or informal payment system." Id. § 151.301(b)(3).

⁵ A person may be exempted from licensing requirements by commission rule or by the "commissioner's order on a finding that the licensing of the person is not necessary to achieve the purposes of this chapter." Id. § 151.003(10).

⁶ Request at 4 (emphasis added). You also explain that "a PEO is not engaged in money transmission with respect to the portion of payroll funds received in advance for payment of state unemployment taxes." Id. at 3, n.5. We therefore limit our opinion solely to whether a PEO's activities relating to the payment of wages to covered employees constitute money transmission services.

S U M M A R Y

A person or entity must obtain a money transmission license from the Commissioner of Banking to engage in the money transmission business under chapter 151 of the Texas Finance Code. A person or entity must obtain a license from the Department of Licensing and Regulation to engage in professional employer services involving the compensation of covered employees under chapter 91 of the Labor Code. A professional employer organization's performance of its statutory duties under chapter 91 of the Labor Code pursuant to a professional employer services agreement does not constitute money transmission for which a separate license is required under chapter 151 of the Finance Code.

Very truly yours,

KEN PAXTON
Attorney General of Texas

BRENT E. WEBSTER
First Assistant Attorney General

RYAN L. BANGERT
Deputy First Assistant Attorney General

RYAN M. VASSAR
Deputy Attorney General for Legal Counsel

VIRGINIA K. HOELSCHER
Chair, Opinion Committee

WILLIAM A. HILL
Assistant Attorney General, Opinion Committee